(Reposted as a top blog on TaxConnections during 2019)
In 2018 Professor Lucy Salyer of the University of New Hampshire published “Under the Starry Flag” – a book largely about the 1868 Expatriation Act. The book describes a period in American history where Britain treated its “subjects” as having perpetual loyalty to the British Crown. To put it simply: One could NOT emigrate to America and expatriate. No matter what one did, those who were born British Subjects were destined to die British Subjects.
The above tweet links to an interview of Professor Lucy Salyer conducted on February 9, 2019. The interview is about Professor Salyer’s new book “Under the Starry Flag”. It is a fascinating (brilliantly researched) work. The publisher describes the book as:
The riveting story of forty Irish Americans who set off to fight for Irish independence, only to be arrested by Queen Victoria’s authorities and accused of treason: a tale of idealism and justice with profound implications for future conceptions of citizenship and immigration.
In 1867 forty Irish American freedom fighters, outfitted with guns and ammunition, sailed to Ireland to join the effort to end British rule. Yet they never got a chance to fight. British authorities arrested them for treason as soon as they landed, sparking an international conflict that dragged the United States and Britain to the brink of war. Under the Starry Flag recounts this gripping legal saga, a prelude to today’s immigration battles.
The Fenians, as the freedom fighters were called, claimed American citizenship. British authorities disagreed, insisting that naturalized Irish Americans remained British subjects. Following in the wake of the Civil War, the Fenian crisis dramatized anew the idea of citizenship as an inalienable right, as natural as freedom of speech and religion. The captivating trial of these men illustrated the stakes of extending those rights to arrivals from far-flung lands. The case of the Fenians, Lucy E. Salyer shows, led to landmark treaties and laws acknowledging the right of exit. The U.S. Congress passed the Expatriation Act of 1868, which guarantees the right to renounce one’s citizenship, in the same month it granted citizenship to former American slaves.
The small ruckus created by these impassioned Irish Americans provoked a human rights revolution that is not, even now, fully realized. Placing Reconstruction-era debates over citizenship within a global context, Under the Starry Flag raises important questions about citizenship and immigration.
In the 19th Century Britain regarded its subjects as subjects for life. Many Americans abroad will appreciate how the book applies to their lives Americans in the 21st century. To put it simply Americans abroad are treated as primarily Americans citizens – even though they are often citizens and residents of other countries. (Shades of the British – History does have a way of repeating itself.) Renunciation is desirable, difficult, expensive (and for those who are in the U.S. tax system – inevitable). For many Americans abroad:
Furthermore, dual citizens (for example the accidental Americans in France) are beginning to request that their countries of citizenship/residence intervene and assist their citizens in breaking ties with the United States. History does repeat itself.
Professor Lucy Salyer’s “Under the Starry Flag” and the 1868 Expatriation Act
Professor Salyer is a historian with a specialty in the history of American immigration and citizenship. “Under the Starry Flag” chronicles the historical context of the 1868 Expatriation Act. (For a fascinating discussion of Congressional speeches leading up to the Expatriation Act – see this excellent post at the Isaac Brock Society. An excellent review of the 1868 Expatriation Act by Daniel Rice is here. The Expatriation Act is discussed at Renunciation Guide here.
About the Expatriation Act
The Expatriation Act of 1868 is found in the U.S. Code and specifically states:
Right of Expatriation
R.S. §1999 provided that: “Whereas the right of expatriation is a natural and inherent right of all people, indispensable to the enjoyment of the rights of life, liberty, and the pursuit of happiness; and whereas in the recognition of this principle this Government has freely received emigrants from all nations, and invested them with the rights of citizenship; and whereas it is claimed that such American citizens, with their descendants, are subjects of foreign states, owing allegiance to the governments thereof; and whereas it is necessary to the maintenance of public peace that this claim of foreign allegiance should be promptly and finally disavowed: Therefore any declaration, instruction, opinion, order, or decision of any officer of the United States which denies, restricts, impairs, or questions the right of expatriation, is declared inconsistent with the fundamental principles of the Republic.
The Expatriation Act was/is a U.S. law which enacted to ensure that (at least from an American perspective) that those who emigrated from other countries and naturalized as American citizen, would be treated by America as American citizens and NOT as citizens of their country of origin. (You may recall that the War of 1812 was fought in part for the reason that the British Navy was impressed by American sailors because they were viewed as British subjects. In short the British were claiming that American citizens were British subjects.) In other words, the United States believes (or believed) that individuals wishing to naturalize as U.S. citizens have the right to sever their citizenship with other countries. Does that mean that the United States believes that U.S. citizens should have the right to divest themselves of U.S. citizenship? This question has not been tested – but is now relevant in a FATCA world.
Significantly at the end of Chapter 10 (on page 174), Professor Salyer writes:
Two issues loomed, undercutting the act’s potential reach. One was whether the 1868 law allowed Americans to expatriate. Despite the general declaration of the right of expatriation, the act focused only on the rights of foreigners to abandon their homelands to become Americans. Perhaps it seemed unfathomable that Americans might want to leave their blessed land, but some had moved and taken up lives elsewhere, swearing allegiance to other sovereigns leaving their status uncertain and the United States open to charges of hypocrisy.
She also made this point in the Q and A in a presentation that she made in New York on January 31, 2019. See:
I highly recommend this video for those who do not have the time to read the book.
FATCA, Citizenship-based taxation and U.S. citizenship
The enactment of FATCA in 2010 demonstrated that history has repeated itself. The United States is now claiming that residents and citizens of other countries, who emigrated from the United States, are still U.S. “tax residents”. Many of these unfortunate souls believe that U.S. citizenship is being forcibly imposed on them. Some are desperate to relinquish U.S. citizenship, but are held captive to America by the highest renunciation fee in the world ($2350) and an the highest Exit Taxes the world has ever known. It appears that history has come full circle. The tyrannical British practices of the 19th Century are now the tyrannical American practices of the 21st Century.
Because this is not well understood by Homeland Americans, it is helpful to describe:
The tyranny of U.S. citizenship-based taxation – 2013
American tyranny has been described by former ACA member Jackie Bugnion in her 2013 submission to the House Ways and Means Committee as follows:
In 1776, the United States declared independence because the mother country on the other side of the ocean was imposing taxes on the colonies for the benefit of England. Resentment started when Britain tried to enforce the Navigation Act after 1763. Resentment increased with the Stamp Act in 1765, a way for Britain to tax the colonies. The British Tea Act of 1773 led to the Tea Party and we all know the outcome – the American Revolution and independence crying out “no taxation without representation”.
Today, the estimated 7 million Americans resident abroad, of whom the majority are long-term overseas residents in high tax OECD countries, face a comparable situation. Their representation in Congress is non-existent in reality. Americans abroad amount to only 1 to 2% of the votes in any particular state; Congressmen and Senators have ignored their tax issues. The unjustified myth that Americans abroad are wealthy and disloyal restricts a rational approach to the problems because of political image issues.
Citizenship-based taxation (CBT) has existed ever since the federal income tax was adopted. Despite CBT being an anomaly involving double taxation, taxation of phantom gains and explicit tax code discrimination, it was grudgingly tolerated by Americans abroad because it was essentially voluntary, most often involved little tax or no U.S. tax liability and basically was not enforced. In particular, the FBAR filing requirement was so obscure that even the big four accounting firms were not aware of the filing obligation dating from 1970 and failed to inform Americans abroad of the need to file the FBAR.
Since 2001, a series of legislative events have radically changed the situation:
- In 2001, the Patriot Act made anything foreign suspect, including Americans residing overseas.
- In 2004, Congress, under the Jobs Act, drastically increased the FBAR civil and criminal penalties to confiscatory levels, creating a disguised form of taxation on assets held overseas.
- In 2006 administration of the FBAR reports was transferred to the IRS for enforcement.
- In 2006 the Tax Increase Prevention and Reconciliation Act (TIPRA) extended the Bush tax cuts and included a compensatory revenue raising provision that reduced the benefit of the foreign earned income exclusion, limited the foreign housing allowance and pushed Americans overseas into higher tax brackets, thereby increasing U.S. tax liabilities for many Americans abroad.
- In 2008 the law relating to renunciation of U.S. citizenship was revised under Section 877A and introduced an Exit Tax on wealthy individuals (defined as “covered”). The law also provided that Americans who inherit from estates of former “covered” U.S. citizens are subject to U.S.
inheritance tax with no exclusion. This outrageous discriminatory provision aims to discourage renunciation of citizenship, but in fact penalizes children of former U.S. citizens for an act they did not commit. In practice, it encourages the children to also renounce their U.S. citizenship.
- In 2009 the IRS launched its initiative against tax evasion linked to foreign assets through the Overseas Voluntary Disclosure Programs and a threatening public relations campaign. While it justifiably targeted U.S. resident tax evaders, it simultaneously trapped Americans abroad who necessarily have foreign assets. The IRS’s one size fits all policy and bait and switch tactics led to abuses of Americans abroad which inspired sharp criticism from the National Taxpayer Advocate.
- In 2010 FATCA was slipped into the HIRE bill with no debate in Congress and no cost/benefit
analysis. FATCA aims to provide the door that closes the fiscal trap by requiring foreign financial institutions to report to the IRS on assets held overseas by U.S. persons. It effectively cuts off many Americans from foreign financial institutions which find it too onerous to maintain American clients. FATCA creates a barrier to free movement of capital and people.
- In 2012 S.3457 proposed to grant the IRS the authority to have a U.S. passport cancelled or not issued if the IRS determined that the individual owed $50,000 or more U.S. tax.
- In 2012 the Ex-patriot Act, S.3205, proposed to deny any “covered” expatriate re-entry into the United States, with retroactive effect for ten years prior to enactment of the law. The Reed
Amendment of the 1996 Illegal Immigration Reform and Immigrant Responsibility Act already
allows the United States to deny entry of former citizens into the United States.
- In 2013, S.268 was introduced; it compounds difficulties created by FATCA.
- In 2013 the Senate Finance Committee included in its tax reform recommendations a provision which would grant the IRS authority to cancel a U.S. passport for tax collection purposes.
This stream of legislation and proposals categorizes Americans abroad as suspected criminals seeking to escape U.S. taxes. Congress has outdone George III and has turned the United States into a fiscal prison, including legislation which is deemed anti-constitutional under the Fifth Amendment1 and is contrary to Articles of the Universal Declaration of Human Rights.2
The foundation of the U.S. fiscal prison is citizenship-based taxation. Americans working and living abroad carry a ball and chain of dual taxation throughout their entire lives up to and including death.
Americans abroad already pay taxes in the country where they reside and receive governmental services.
The additional U.S. tax obligation creates inevitable incompatibilities and discrimination and even requires Americans abroad to break foreign exchange control laws to pay U.S. taxes.
A revolution among long-term overseas residents is now underway. Five years ago, Americans abroad never talked about renunciation of citizenship. Today, it is a common topic in the press and among the community abroad. For more and more individuals, renunciation is the only solution to an intolerable situation created by the U.S. imposing its laws beyond its borders. The United States is literally destroying the community of Americans abroad, which plays an essential role in representing U.S. interests and goodwill overseas. The United States is shooting itself in the foot.
While the absolute number of renunciations, currently around 2,000 a year, is insignificant compared to the average annual U.S. citizenship naturalizations of 680,000, renunciations have multiplied seven times over the last four years. So far we have seen only the tip of the iceberg if CBT remains in force.
Today’s situation leads to serious hidden prejudice for the United States. U.S. exports are far below where they should to be because citizenship-based discourages U.S. companies from deploying U.S. citizens overseas to sell U.S. products; the law makes them too expensive. U.S. tax law and FATCA create insurmountable barriers for small and medium-sized companies to establish beachheads abroad to develop exports. The loss represents millions of U.S. jobs, hundreds of billions of dollars of exports, billions of dollars of U.S. tax revenue, and an unsustainable trade and budget deficit. Americans married to a foreign spouse, who represent about a third of the Americans resident abroad, now hesitate to register their children born abroad with the U.S. Embassy. The hot thing among young adults in their twenties is to renounce U.S. citizenship; they are aware of the impossible web of U.S. regulations that restrict job opportunities and personal freedom. Pushing away the young generation of Americans abroad is an immense loss to the United States. In prior generations, many highly educated multi-lingual American children returned to the United States, founded companies and created jobs in the U.S.
Adopting RBT will stop this revolution immediately. RBT law needs to be drafted in the spirit to allow free movement of individuals to leave and return to the United States, to reinforce the competitiveness of Americans and the United States overseas, to provide a simple, non-penalizing transition to RBT for the community of Americans already overseas, to ensure that Americans abroad are not subject to FATCA and FBAR, to adapt existing bilateral tax treaties and enter into new tax treaties so that withholding tax rates on U.S. source income are reasonable and to ensure that Americans abroad who have the majority of their assets in the United States (retirement funds, pension funds, real estate) are not disadvantaged under RBT with regard to either income or estate taxes.
I thank you for the opportunity to comment and hold high hopes that your bi-partisan efforts will lead to the constructive tax reform so necessary for Americans residing abroad.
The tyranny of U.S. citizenship-based taxation – 2019
The treatment of Americans abroad is infinitely worse than when Ms. Bugnion was writing in 2013. The Section 965 Transition Tax has punished many Americans abroad for their past. Sec. 951A GILTI is ensuring that they cannot have small businesses. The Sec. 877A Exit Tax means that they United States will confiscate the non-U.S. assets of people who attempt to renounce. The United States is actually imposing a higher and more punitive level of taxation on U.S. citizens who live outside the United States than on U.S. citizens living inside the United States. To add insult to injury, revocations of U.S. passports for delinquent tax debts are now in force.
Concluding thoughts …
Professor Salyer has done a masterful job of researching the historical context of the 1868 Expatriation Act. The book also includes a general discussion of the evolution of U.S. citizenship law and how it relates to the development of U.S. immigration law.
Although I think the book will be of particular interest to Americans living outside the United States, it wonderful exposition of an important period of American history.
Written by John Richardson.